By Sheila Mullan

NEW YORK (MNI) Richmond Federal Reserve President Jeffrey Lacker
Tuesday argued that more declines in long-term U.S. interest rates are
not likely to spur U.S. economic growth.

Furthermore, should the Fed’s policy of lowering long-term rates
spur more growth, it could not do so without an increase in inflation in
the U.S., he said during a question and answer session following a
speech to the Shadow Open Market Symposium in New York.

Lacker is a voter on the Fed’s policymaking Federal Open Market
Committee this year, and has dissented at every meeting so far.

On the question of whether more declines in long-term U.S. rates
would lead to better growth, Lacker’s response was simple: “Not likely.”

“Monetary policy is not likely to raise the growth rates now” by
lowering long-term rates further, he said. “And even if so, it is not
likely to do it without raising inflation.”

He noted that U.S. households have been “hunkered down
significantly” since the financial crisis, and have rationally decided
to be cautious in spending given the uncertain unemployment outlook. So
there are “limits” to spurring consumer spending given the uncertain
employment outlook.

Lacker stressed the dangers of enlarging the Fed’s balance sheet
too much, warning that the “larger the Fed’s balance sheet, the riskier
the exit becomes.”

“The larger the Fed portfolio gets, the bigger the chance for
mistakes,” he added.

He also said there “could be inhibition” at the Fed on “selling
very rapidly” with a very large balance sheet of assets. However, Lacker
said the Fed can raise rates “as rapidly as needed” when the time
eventually comes to normalize monetary policy.

Lacker said the Fed, because of its quantitative easing programs,
faces the question of if it should it lower “all yields in parallel” or
“just some” as it choses which assets to buy.

Furthermore, in considering policy alternatives, Lacker said it is
important to “be careful of taking the (economic policy) models too
seriously” amid an atmosphere where policymakers cannot count on the
economy to respond in textbook fashion to policy moves.

On the subject of how high U.S. rates need to go to become normal
once again, he said; “People should prepare for a wide range of
contingencies.”

On the improvement in the housing market, Lacker noted that there
is still overhang in the housing supply in “many areas,” but added that
homeownership is now rationally seen by consumers as “riskier” compared
to before the housing crisis.

But he also argued that the Fed should not run monetary policy
based “on how it affects housing alone.”

He added that the U.S. economic resurgence is being blocked by
“more housing that we need.”

–email: smullan@marketnews.com; 212-669-6432

** MNI New York Newsroom: 212-669-6430 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]